In Lesson 4 we used T-Accounts to record the
transactions for ABC, the lawn mowing guys. What you didn't know at the time is
that we were actually recording transactions in General Ledger Accounts. A
General Ledger is just a formal set of T-Accounts. Each account that we want to
track and keep up with has a separate page or pages maintained in a record book
called the General Ledger. The book is organized into major sections just like
the Accounting Equation that we studied in previous lessons. Do you have any
idea what these sections might be ? Come on this question is not that hard. The
general ledger's major sections are Assets, Liabilities, Owner's Equity,
Revenues, Expenses, and Draws.

For each item (account) in our General Ledger,
we record the increases and decreases for a period (usually a month) and
calculate its ending balance. The ending balance of the account is easily
determined by adding the increases and subtracting the decreases from the
account's beginning period balance.

Ending Account Balance = Beginning Balance
+ Increases - Decreases

If you noticed in my above equation I used the
terms increases and decreases. If you also recall in our discussion about
debits and credits in Lesson 3, I tried to stress the fact that when applied to
bookkeeping these terms need to be associated with the types of
accounts.

We also should know by now that the type of
accounts have a normal balance that is either a debit or credit balance. So
actually the above equation is stated in two ways. The equation is stated one
way for debit balance accounts, and another way for credit balance
accounts.

Using our bookkeeping terms debits and
credits, we come up with the following equations:

Simply stated a General Ledger is just a book
containing the summarized financial transactions and balances of the
accounts for all of a business's assets, liabilities, equity, revenue,
and expense accounts.

One other record that goes hand in hand with
the general ledger and that we've touched on before and used in the prior
lesson is The Chart Of Accounts. Remember The Chart Of Accounts is
simply a listing of all the accounts in the general ledger that contains the
account's name, a brief description of the account, and usually an account
number assigned to aid in recording and tracking transactions.

It's chief purpose is to serve as an aid
(reference) for looking up accounts and their associated account
numbers.

For this lesson, we expanded our chart of
accounts by adding account numbers and grouped the numbers into ranges that
represent the major type of accounts.

Chart Of Accounts For ABC MowingNote:The charts of accounts used in this tutorial were purposely kept
simple and used to illustrate what the chart of accounts is and how it's used.
For those of you that are curious, I've provided a detailed list of the
accounts you might encounter in the "real" world.

You might also want to check out my tutorial
So, you want to learn Bookkeeping! - Chart Of Accounts.

Normally a numbering system is set up with a
range of numbers for assets, liabilities, equity, revenue, and expense
accounts. ABC Assets have a range from 100-199 ;Liabilities a range from
200-299; Equity a range from 300-399, Revenues a range from 400-499, and
Expenses a range from 500-599.

Account Name:Mulch Expense
Account Number:520
Description:Expenditures for mulch used for yard work

Of course most businesses have many more
than our eleven accounts we used for our sample ABC business. Can you think of
some other accounts that we might need and want ? How about telephone,
utilities, professional fees (that's me), salaries & wages, equipment
rental, building rental, maintenance & repairs, contract labor, office
equipment just to name a few.

Notice that the account has an amount column
for debits (left side or first column) and an amount column for credits (right
side or second column).

General Journal

Journals are preliminary records where
business transactions are first entered into the accounting system. The journal
is commonly referred to as the book of original entry. Specialized Journals-are
journals used to initially record special types of transactions such as sales,
cash disbursements, and cash receipts in their own journal.

The end result of double entry bookkeeping is
having an up to date , in balance, and properly posted Ledger. In our prior
lessons we recorded all our debits and credits (transactions) directly in the
General Ledger. This would work for a small business that had very few
transactions but would become unwieldy for most businesses with any volume of
activity. By its very definition the General Ledger is supposed to be a
summary record of a business's financial transactions.

It logically follows that since we only want
summary amounts in our Ledger we need to record our detail entries some place
else first. What record(s) do we use to do this ? You're right ! Journals are
our preliminary records. All our transactions are first entered in a
preliminary record called a journal or book of original entry. This process is
called journalizing. After our business transactions have been entered in our
journal(s), they are then periodically (usually monthly) summarized and totaled
and then transferred (posted) to the General Ledger as summary
entries.

What type of information is included in the
Journal Record ?

Entry Number

Date of each transaction

Names and/or the account numbers of the
accounts to be debited or credited

Amounts of the debits and
credits

Posting Reference-Account Number in the
General Ledger

Explanation or description of the
entry

The journals contain all the chronological (by
date) information necessary to record debit and credit amounts in the accounts
of the General Ledger.

Click On the posting reference (account
number) to see the entry posted in the sample General Ledger (only for
posting reference Account No:100 Cash )

Do you notice anything odd about any of our
entries in our General Journal ? Look at entry number 4 (GJ-1-4). It doesn't
have a posting reference. Why not ? The answer is simple. Entry Number 4 has
not yet been posted to the General Ledger. This is our way of keeping up with
what entries have and have not been posted to the General Ledger.

Oh Shucks, those mowing guys again !
Notice that this time the check numbers, invoice numbers, and dates were
added to the transaction descriptions.

Navigation:
Interactive Links are included in the following transaction list.

Click on the Journal Entry Link to be
taken to the Formal Journal Entry recorded for the transaction in the
General Journal. The transaction will be the first one displayed in the
Journal.

1. December 2, xxxx ABC
mows a client's yard and receives a check # 484 from the customer for $50 for
the service provided.Journal Entry 1 2. December 4, xxxx ABC purchases $100 worth of office
supplies and stores them in their storage room. The office supply store gives
them an invoice # 983 that allows them to pay for them in 15 days (on
account).Journal Entry 2 3. December 8, xxxx ABC places an ad in the local
newspaper receives the invoice from the supplier # 555 and writes a check # 900
for $25 to the newspaper.Journal Entry 3 4. December 10, xxxx ABC purchases five mowers for $10,000
and finances them with a note from the local bank.Journal Entry 4 5. December 15, xxxx ABC mows another customer's yard and
sends their customer a $75 bill (invoice # 1000 ) for the service they
performed. They allow their customer ten (10) days to pay them for this service
(on account).Journal Entry 5 6. December 20, xxxx the owner of ABC needs a little money
to pay some personal bills and writes himself a check # 901 for $500.Journal Entry 6 7. December 22, xxxx ABC pays the office supply company
$100 with a check # 902 for the office supplies that they charged (promised to
pay invoice # 983).Journal Entry 7 8. December 27, xxxx ABC receives a check # 55 from the
customer who they billed (invoiced # 1000) $75 for services and allowed 10 days
to pay.Journal Entry 8 9. December 29, xxxx ABC purchased some mulch for $60 and
received an invoice # 777 from their supplier with terms of 15 days. The mulch
was used on a customer's yard.Journal Entry 9 10. December 31, xxxx ABC bills (prepares an invoice #
1001 ) the customer $80 for the mulch and mowing his yard and receives a check
for $80 # 555 from the customer.Journal Entry 10

General Journal

The transactions for ABC are presented below
in a formal General Journal. Review the entries and if you have any questions
go back to Lesson 4 for detailed discussions for each of the
transactions.

The reference numbers refer to General
Journal, Entry Number, and Page Number. GJ-1-1 means GJ (General
Journal), Page 1, and Entry 1. The Posting Reference (Post Ref.) is the General
Ledger Account Number taken from our Simple Chart Of Accounts.

Navigation:
Interactive Links are included in our following General Journal.

Click on the Underlined Entry Number
(GJ-1-1, etc.) to Return or be Taken To the Transaction
Listing.

Click on the Underlined Account Name
Link or the Underlined Posting Reference (Account Number) Link to see
the entry posted (transferred) from the General Journal to The General
Ledger Account.

We used a Trial Balance at the end of Lesson 4
to check our postings. I just didn't tell you at the time. Let's review the
formal definition. A Trial Balance is a listing of all the accounts appearing
in the general ledger with the dollar amount of the debit or credit balance of
each. It is used to make sure the books are "in balance" -total debits and
credits are equal.

A trial balance is just a worksheet that
bookkeeper's and accountants prepare from the General Ledger to check that the
books (General Ledger) are in balance (Debit Account Balances = Credit Account
Balances).

Let's prepare our trial balance for ABC at the
end of December.

Navigation:
Interactive Links are included in our Trial Balance.

Click on the Underlined Account Name
Link to go to the Ending Balance in the General Ledger
Accounts.

Sure enough our debit balances equal our
credit balances. How did we determine what account balances had a debit balance
and what account balances had a credit balance ? It was easy because we used
the parentheses ( ) to denote that an account balance was a credit. Therefore,
all the balances that are not enclosed in parentheses make up our
Debit Balance Accounts and all the balances enclosed in
parentheses make up our Credit Balance Accounts.

So you know
!
We covered this earlier; but, it's worth repeating. In this lesson we used
parentheses ( ) to indicate credits. Remember that this is just one of the
methods used for indicating debits and credits and whether an account's balance
is a Debit or a Credit.

Ways and symbols
you might run across are:

Dr for Debit and Cr for Credit

+ (Plus Sign) for Debit and - (Minus Sign)
for Credit

No Bracket for Debit and < >
(Brackets) for Credit

No Parentheses for Debit and ( )
(Parentheses) for Credit

Symbol

Indicates a
Debit

Indicates a
Credit

Dr / Cr

Dr

Cr

+ / -

+

-

No Bracket / Bracket <
>

< >

No Parentheses /
Parentheses ( )

( )

Note: The plus (+) and minus (sign) are
often used by accounting and bookkeeping programs to indicate debits and
credits. Don't get confused and think that the plus sign means an increase or
that the minus sign means a decrease. They do not. In this case, they
are simply symbols that mean either a debit or a credit.

Normal Balances for the Types of
Accounts

Just to keep you on your toes - do you recall
what type of accounts normally have a debit or credit balance ?

How do you initially determine that an Account
has a Debit or Credit Balance ? This is simply a matter of determining if the
Account has more Debit Amounts Posted or More Credit Amounts Posted. If More
Debits Than Credits have been posted to the Account, the Account will have a
Debit Balance. Likewise, if More Credits Than Debits have been posted to
the Account, the Account will have a Credit Balance.

You have now been introduced to some of
bookkeeping and accounting's formal records, namely the General Ledger and
General Journal. You could get by with just these two records, but if your
business like most has many transactions instead of the few that ABC had you'd
be spending a heck of a lot of time recording and posting. What's the solution
to streamlining the recording and posting processes.

Remember when I introduced Journals in this
lesson where I briefly mentioned Special Journals ? Well, they are the
solution.

Some Special Journals a business will
normally have are:

Cash Receipts Journal

Cash Disbursements Journal (Check
Register)

Payroll Journal

Sales Journal

Purchase Journal

General Journal

All these journals are designed to record
special types of business transactions and post the totals accumulated in these
journals to the General Ledger periodically (usually once a month).

Instead of using just one journal to record
all our business transactions we use many. Although this tutorial is not going
to discuss the Special Journals I wanted to make you aware of them and the
purpose they serve.

If you want to learn more about Special
Journals, my So, you want to learn Bookkeeping - Special Journals
tutorial covers this topic.

Before we move on to Lesson 6, since they say
that a picture's worth a thousand words, let's use a picture to illustrate the
flow of information (business transactions) into our bookkeeping records.
You're right Financial Statements haven't been discussed, but guess what's
coming in Lesson 6 ?

Source Documents

provides the initial data about
business transactions.

Journals

use the information from the
source documents to create a chronological listing of all business
transactions and detailed information about each
transaction.

General Ledger

uses the information transferred
from the journal(s) to summarize the data into individual
accounts.

Trial Balance

uses the information from the
General Ledger to summarize the data to use for preparing the
Financial Statements.

Financial Statements

uses the summarized data contained
in the Trial Balance to prepare the business's financial reports
.

Where's that darn light and quiz ? This
reminds me of an ole American commercial about hamburgers with an ole
lady driving up to a fast food window and after being served asking
"Where's the beef ?". I do think you deserve a break; but, before we go
get back under the light. Just a few questions and then you're free to
take a break.